Central Planning Is More Than Just Friction

It is easy to think of government interference into the economy like a kind of friction. If producers and traders were fully free, then they could improve our quality of life—with new technologies, better products, and lower prices—at a rate of X. But the more that the government does, the more it burdens them. So instead of X rate of progress, we get the same end result but 10% slower or 20% slower.

Some would go so far as to say, “The free market finds ways to work even through government restrictions, taxes, and regulations.” We won’t address cardboard straws emerging where plastic straws are banned. Or gangs selling illegal drugs on the black market, when they are prohibited by law.

As usual, we want to talk about the most important kind of government intervention. And it happens to be the one kind of government intervention that is accepted by nearly everyone. The intervention supported by the otherwise-free-marketers.

Monetary intervention.

Under monetary central planning, do people work at the same tasks, at the same companies they would have worked in a free market, producing the same goods? And is the only consequence, that goods have a higher price (due to inflation)?

Can we treat the dollar as a universal constant, if we adjust it for the change in prices?

Keynes and Lenin

We will trot out that infamous quote of Keynes citing Lenin, again. From Consequences of the Peace:

“Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become “profiteers,” who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuate wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.”

The first part would fit with the above-stated premise. Government confiscates, and make the people poorer. The same as they had been, only a bit less in proportional to the amount confiscated. However, the next part observes that the confiscation harms most people but enriches a few, arbitrarily.

Think about a serious inflation. Suppose prices are going up 10% a year. Some businesses will have the foresight to buy extra raw materials. This hoarding enables them to make extra profits when they sell their finished goods, months or a year later. They could make even more, if they borrowed to finance even-greater hoarding. This is a picture of the 1970’s.

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Gary Anderson 1 month ago Contributor's comment

Two things. First, you spoke about hoarding, but not about bond hoarding. Second, you mentioned the dollar and gold as money, but if you ask a clearinghouse, bonds are the real money. They are the collateral. So, there is a stability there. I am not saying it is a good system, but after MBSs blew up, interest treasuries became the collateral of choice and we entered the new normal.